SCX is a $2 billion chemical company with a plastic plant located in Durango, Colorado. The Durango plastic plant of SCX was started 30 years ago to produce a particular plastic film for snack food packages. The Durango plant is a profit center that markets its product to film producers. It is the only SCX facility that produces this plastic. A few years ago, worldwise excess capacity for the plastic developed as a number of new plants were opened and some food companies began shifting to a more environmentally safe plastic that cannot be produced with the Durango plant technology. Last year, with Durango's plant utlization down to 60%, senoir management of SCX began investigating alternatives uses of the Durango plant. The Durangos plant's current annual operating statement appears in the accompanying table: Revenue $36 VC $21 FC $22 Total cost $43 Net loss ($7) Note: fixed costs (FC) are $17 Plant administration and $5 Depreciation One alternative use of the Durango plant's excess capacity is a new high-strength plastic used by the auto industry to reduce the weight of cars. Additional equipment required to produce the automotive plastic and Durangos plant can be leased for $3 million per year. Automotive plastic revenues are projected to be $28 million and variable costs are $11 million. Additional fixed costs for marketing, distributuion, and plant overhead attributable solely to auto plastics are expected to be $4 million. All of SCX's divisions are evaluated on a before-tax basis. A. Evaluate the auto industry plastic proposal. Compare the three alternatives: 1. close durango 2. produce only film plastic at durango and 3. produce both film and auto plastic at durango. Which of the three do you suggest accepting? (if it is closed, one-time plant closing costs will just offset proceeds from selling the plant). B. Suppose the Durango plant begins manufacturing both film and auto plastic. Prepare a performance report for the two divisions for the first year, assuming that the initial projections are realized and the film division's 2016 rev and expenses are the same as in 2015. Plant administration ($17 million) and depreciation ($5 million) are common costs to both the film and auto plastic divisions. For performance evaluation purposes, these costs are assigned to the two divisions based on sales revenue. All costs incurred for the Auto Plastics division should be charged to that division. C. Does the performance report in part b accurately reflect the relative performance of the 2 divisions? why or why not? D. In 2017, the Durango Plant is able to negotiate a $1 million reduction in property taxes. Property taxes are included in the "plant administration account". In addition, the Film division is able to add $3 million in additional revenues (with $2.1 of additional variable cost) by selling film to European food packagers. Assuming that these are the only changes at Durango plant between 2016 and 2017, how does the Auto Plastics Division's performance change between these two years? Allocate the common costs using the method described in part b. E. Write a short memo evaluating the performance of the Auto Plastic Division in light of the events in the year 2017 and describing how these events affect the reported performance of the auto plastics division.